Source: Article by Mike Teuchert, a tax partner at Grant Thornton Cape Town
30 June 2009
A limited time only for exemption
In the most recent draft amendments to the fiscal laws, National Treasury have proposed that individuals who own their private dwelling in either a company or a closed corporation (CC) will have until December 31 2012 to transfer the immovable property into their own name in order to obtain capital gains tax (CGT) roll over relief and exemption from transfer duty and Secondary Tax on Companies (STC).
(Ed. The Commissioner for the South African Revenue Service issued a directive on 10 December 2009 entitled Transferring A Residence from A Company or Trust to A Natural Person: Exemption In Terms Of Section 9(20) Of the Transfer Duty Act, 1949). Read more
The previous limited window period
In anticipation of the introduction of CGT, a limited window period was granted in 2001 to allow the transfer of a private dwelling from a Trust, company or CC to the individual owner without incurring transfer duty and / or STC. The impetus for this relaxation is that the CGT exclusion for a primary residence is only available where the private dwelling is owned by a natural person.
In 2002 the transfer duty act was amended to levy transfer duty on a change in the beneficiaries of a trust, members’ interest in a CC or shareholding of a company which primarily owned residential property.
At the time that the limited window period to transfer residential property was granted in 2001, no intent was telegraphed by the fiscal authorities which may have highlighted that they were contemplating the levying of transfer duty on the change of ownership in a CC or company.
By owning residential property in a CC or company, the owner is exposed to CGT and STC, which effectively means that any capital gain would be subject to a fiscal charge of just under 22%. This makes it fiscally unattractive for a prospective purchaser to acquire ownership of an existing property owning entity and encourages them to acquire the property outright into their personal name.
Likewise, for the owner of residential property in a corporate entity, the high fiscal costs have led owners not to transfer the property into their own names in order to relieve them of the inconvenience of owning the property in a company or CC.
The relevant corporate legislation currently imposes an annual duty on all companies and CCs, thus exacerbating the fiscal charges associated with owning a primary residence in a corporate entity.
The new window
In terms of the new proposals, the distribution of a domestic residence from a domestic residence company to a natural person will result in an exemption from transfer duty, STC and provide CGT roll over relief to the company and the individual.
These fiscal exemptions are all available on condition that the distribution is performed in anticipation of or in the course of liquidation or deregistration of the domestic residence company or CC and the distribution occurs after 1 January 2010 but before January 1 2012.
A domestic residence is a residence that is exclusively used for domestic purposes. No clarification has been given to the meaning of the term domestic purposes, although it would exclude the situation where a person also uses their residence for the purposes of running a part-time small business.A domestic residence company can either be a CC or a company and
· all its shares are directly owned by a natural person with effect from 11 February 2009 until the date of the distribution of a domestic residence; and
· it owns a domestic residence as its sole asset which has been used as a domestic residence.
This last requirement may prove to be too severe and some relaxation should be forthcoming from Sars in order to achieve the desired result of reducing the number of corporate entities. As the current wording stands, it would, for instance, disqualify the exemption where the company has a positive bank balance or a utility deposit.
The CGT roll over relief effectively places the natural person in exactly the same position as the company with regard to the date of ownership, the incurral of additional costs towards the base cost and any valuation of the domestic residence for the purposes of CGT.
Where clients decide to take advantage of this opportunity they will still be responsible for other costs associated with the transfer of immovable property, such as conveyancing fees and bond cancellation costs.
Whilst the relaxation of the fiscal charges is restrictive, it is nonetheless a most welcome opportunity granted by the authorities for individuals who own their personal dwelling in a corporate entity to transfer the property into their own names with limited costs.